Rev. Rul. 79-424

ISSUES

If a U.S. citizen who resides in the Virgin Islands erroneously pays amounts to the United States Treasury as income tax and files claims for refund of the asserted overpayments,

(1) may the asserted overpayments of tax be refunded to the taxpayer if the claims were timely filed, and

(2) is the period of limitations in section 6511 of the Internal Revenue Code applicable to the transfer of the erroneous payments from the United States Treasury to the treasury of the Virgin Islands?

FACTS

The taxpayer is a United States citizen who was a resident in the Virgin Islands for taxable years 1972, 1973, 1974, 1975, and 1976 and to whom section 932 of the Code (concerning Citizens of Possessions of the United States) does not apply for those taxable years. The taxpayer timely, but erroneously, filed income tax returns with the United States for 1972, 1973, 1974, 1975 and 1976. Payments of the amounts shown as tax due on these tax returns were made with the returns. Under section 28(a) of the Revised Organic Act of the Virgin Islands, Pub. L. 517, 1954-2 C.B. 595, the taxpayer was not required to file income tax returns with the U.S. for the years in question but was required to file returns with the Virgin Islands and to pay the taxes due to the treasury of the Virgin Islands. On April 15, 1978, the taxpayer filed claims for refund with the United States requesting that the amounts erroneously paid to the United States Treasury be refunded to the taxpayer or transferred to the treasury of the Virgin Islands for application against the taxpayer's Virgin Islands tax liability.

LAW AND ANALYSIS

Section 6511 of the Code provides that a claim for refund of an overpayment of any tax imposed by the Code for which a taxpayer is required to file a return must be filed by the taxpayer within 3 years from the date the return was filed or 2 years from the time the tax was paid, whichever of such periods expires the later.

Section 7651 of the Code provides that, except as otherwise provided in section 28(a) of the Revised Organic Act of the Virgin Islands, all provisions of the laws of the United States applicable to the assessment and collection of any tax imposed by the Code, or any other liability arising under the Code, shall extend to and be applicable in any possession of the United States in the same manner and to the same extent as if such possession were a state, and that such tax shall be paid into the treasury of the United States.

Section 28(a) of the Revised Organic Act of the Virgin Islands provides that the proceeds of the United States income tax levied by the Congress on the inhabitants of the Virgin Islands shall be covered into the treasury of the Virgin Islands.

However, section 28(a) of the Revised Organic Act does not provide that inhabitants of the Virgin Islands are exempt from the applicable taxing statutes of the United States. It provides that such persons shall satisfy their income tax obligations to the United States by paying tax on income derived from all sources, both within and without the Virgin Islands, into the treasury of the Virgin Islands. Section 28(a) contemplates that an inhabitant of the Virgin Islands has two tax obligations: the tax obligation to the United States remains in existence for as long as the taxpayer owes a tax to the Virgin Islands; if a taxpayer pays the Virgin Islands tax, the United States tax obligation is satisfied. Conversely, failure to pay the tax due to the Virgin Islands continues the liability to both jurisdictions. Since the Revised Organic Act does not contain a time limitation for the transfer of funds to the treasury of the Virgin Islands, the right of the Virgin Islands to receive the federal income taxes derived from the Virgin Islands is in the nature of a continuing claim against the United States, whether the tax years in question are open or closed for refund or credit under section 6511 of the Code.

The taxpayer should not have filed income tax returns with the United States and paid the taxes due to the United States Treasury. However, a claim for refund of the United States taxes must be filed within the period of limitations provided in section 6511 of the Code in order to recover such overpayments. For the years 1972 and 1973 no refunds can be made to the taxpayer because the period of limitations under section 6511 has expired. For the years 1974, 1975 and 1976 the period of limitations has not expired. However, no refunds can be made to the taxpayer because the taxpayer has not made payment of any tax liability to the treasury of the Virgin Islands.

However, the amounts paid for all of these years (1972 through 1976) can be transferred from the United States Treasury to the treasury of the Virgin Islands.

HOLDINGS

1. No refunds by the United States may be allowed to the taxpayer unless a claim for refund is timely filed under section 6511 of the Code and the taxpayer also has made payment of a tax liability to the treasury of the Virgin Islands.

2. The period of limitations in section 6511 of the Code is not applicable to the transfer of the erroneous payments from the United States to the treasury of the Virgin Islands.

3. Upon proper application of the taxpayer, the amounts paid for the years 1972-1976 will be transferred from the United States Treasury to the treasury of the Virgin Islands.